Future looks bright for Ashaka with Lafarge Africa’s consolidation offer

The challenging state of the Nigerian economy has put a number of companies in quandary.

Foreign exchange crisis means most manufacturers scramble to get inputs from abroad, just as insecurity in some parts of the country plunges a number of corporate organisations into suboptimal operations.

Ashaka Cement plc is one of the manufacturing companies hard hit by insecurity, resulting from insurgency in the north-eastern Nigeria. Insurgency has led to factory shut-downs, loss of revenue and profits as well as lower share valuations in the Nigerian Stock Exchange for Ashaka.  In the last financial year, shareholders merely took home N15k dividend per share.

The operational hurdles which impacted the last quarter (Q4) of 2015 result continued in the first quarter (Q1) of 2015, cutting top-line by 21 percent.

In fact, the SBG Securities, member of Standard Bank Group, did an analysis on Ashaka and recommended a SELL option for shareholders on limited upside of 2.6  percent. This shows all is not well with the cement maker’s valuation.

In order to expand investment and operations in the company while boosting returns for shareholders, Lafarge Africa, which already owns 82.46 percent of Ashaka, is offering minority investors of the Gombe State-based cement (who own 17.54 percent shares) an opportunity to upgrade.

Lafarge Africa wants these shareholders to enjoy the benefits of being Ashaka and Lafarge Africa’s shareholders, such that they can become indirect shareholders of the Gombe-based cement firm.

According to Lafarge Africa, these minority shareholders stand to reap a number of dividends. First, there will be increased value for their investments. As at the time Ashaka declared 15 kobo per share, Lafarge Africa declared N3. Without doubt, the capacity of the two companies are poles apart, as Lafarge Africa has 8.5 million metric tonnes (MT) capacity and will soon hit 12 million MT, while Ashaka only has 1 million MT.

Second, Ashaka will have an increased capacity to borrow, as they can now get funds using Lafarge Africa’s balance sheet.

More so, with the state of insecurity across the country, especially in the north-east, it makes investment sense to diversify and get more returns. The minority shareholders, who are lucky to upgrade to Lafarge Africa’s status, will enjoy the returns from Lafarge Africa, Wapco Operations and Ashaka.

Again, there is currently little liquidity in Ashaka shares, such that it is still difficult to sell them. The SBG Securities said Ashaka’s shares have lost c21 percent following an unimpressive Q4 15 result, adding that “from current levels we do not see a meaningful catalyst supportive of a re-rating of Ashaka’s shares.” Lafarge believes this arrangement favours the minority shareholders and Ashaka in general.

“In this offer, you have 202 shares of Ashaka for 57 shares of Lafarge Africa,” Bruno Bayet, head of strategy for Lafarge Africa Plc, told Real Sector Watch exclusively.

“This translates to 3.54 shares of Ashaka to one share of Lafarge Africa. If you multiply 3.54 by 15k (last dividend), you probably get nearer to 50k, whereas that share in Lafarge would have handed you N3. This offer gives you 24 percent upside in the value of your investment,” Bayet said.

“This is the time for an Ashaka shareholder to move to Lafarge level. We are giving him additional N3 for doing so. So if you own 2000 shares of Ashaka, you get an extra 4000,” he further said.

With this arrangement, the management of Ashaka remains the way it is. Ashaka will remain a legal entity and may no longer be listed on the stock exchange after some time.

A key reason for considering this option is that Lafarge Africa is expanding and has a bigger picture of what it wants to do in the nearest term in Nigeria.

Apart from expanding capacity, the firm is a reference point on energy efficiency, already using biomass, a form of renewable energy, in its Wapco  factory, located at Ewekoro, Ogun State.

The building materials giant also needs consolidation to compete better and roll out various innovative programmes in its cupboard. The company stands to be more profitable in the nearest future, as it readies to introduce Road Cement and other innovative products.

Recently, Lafarge Africa acquired an additional 50 percent stake in the United Cement Company of Nigeria (Unicem), having earlier acquired 35 percent equity in the Cross River-based cement company.

At the conclusion of the transaction, Lafarge Africa will own an indirect interest of 100 percent of the issued share capital of Unicem.

To a Lafarge Africa stakeholder, this shows ambition and the company’s confidence in the Nigerian economy.

“Lafarge shareholders will now be more confident that they are part of the whole process and we can support it with our balance sheet,” said Bayet.

Analysts at SBG Securities see this as a good deal for minority shareholders.

“Based on our analysis, we expect minority holders in Ashaka to  accept this offer. On our estimate, implied valuation (N23.8/s) suggests  FY16E Enterprise Value (EV)/  Earnings before interest, taxes, depreciation and amortization (EBITDA) of 16.6x and a P/E of 20.7x which we don’t see as attainable in the medium term. Relative to the average multiples of Dangote  Cement and Lafarge Africa, the implied valuation indicates a 70 percent and 30 percent premium on a FY16E EV/EBITDA and PE basis respectively,” SBG Securities said.

 

ODINAKA ANUDU

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